Alpha forecasts must be shrunk (adjusted toward zero) to account for less-than-perfect forecasting quality. Compiling past analyst

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Alpha forecasts must be shrunk (adjusted toward zero) to account for less-than-perfect forecasting quality. Compiling past analyst forecasts and subsequent realizations allows one to estimate the correlation between realizations and forecasts. Regression analysis can be used to measure the forecast quality and guide the proper adjustment of future forecasts. When alpha forecasts are scaled back to account for forecast imprecision, the resulting portfolio positions become far more moderate. L02

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ISE Investments

ISBN: 9781266085963

13th International Edition

Authors: Zvi Bodie, Alex Kane, Alan Marcus

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